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A report, warts and all - John Consiglio

Photo: Chris Sant Fournier

Photo: Chris Sant Fournier

The 10th Financial Stability Report (2017) recently produced by the Financial Stability Department of the Central Bank of Malta, and endorsed by the national Financial Stability Committee, must surely rank as the best tool for all those who regularly try to follow the developments of Malta’s financial sector, that part of our national economy on which so many eyes – many often incompetently so – are often set for them then to comment upon, often simply firefrom the hip.

Ask this simple (admittedly loaded) question to most people, or even to many journalists: “How many banks does Malta have?” Most answers will go as far as five. But the reality is 25, even as this total distinguishes between domestic (core and non-core to the overall national financial system) and domestically registered banks which however only operate internationally. Or, ask most people what does the national financial institutions system consist of… and you’re likely to get even more blank faces, with most people not having an idea of what the domestic investment funds and (perhaps less so) the domestic insurance companies really all do. 

So what this wonderful publication does is to tell citizens what is the real state of this whole important reality of the country. Even as so much limelight is at times thrown on it when some young whipper-snapper bylines a press report politically intentioned to harm, or even laud, this or that institution or even regulator, even then the simple answer to such people is to ask them whether they have really read the totality of a report such as this, or attentively consulted the 57 charts, tables, and boxes, and appendices which contain such wealth of information about the real state of Malta’s financial sector.

During 2017, the financial services sector was still extremely strong. Pure statistics evidence such strength on many fronts and these all come out in the charts and tables. The quality of the loan portfolio of the core domestic banks continued to improve, even as the quantum of non-performing loans (NPLs) dropped. There is a sort of heritage element in this of which today’s bankers in Malta have every right to be proud, even as one accepts the historical fact that this was perhaps something ingrained into our system and ethos from as far back as the times of Barclays Bank and its predecessors. Yes, in finance, it is extremely good to be outrightly conservative.

In quite some long past years all the local banks used to show in their annual reports figures and percentages of the various sectorial economic activities to which their lendings would be directed. Each bank then felt it its duty to tell how much it was lending to the retail, industrial, manufacturing, building and construction, and services sectors of the economy. This was a time when local monetary policy was still under full Central Bank of Malta jurisdiction, and so the central bank did in fact have powers of (even if under traditional “nod and wink” methodology) direction to the local banks to where they should and could direct (or reduce) the bulk of their lendings.

This time round the component percentages of such figures for the core domestic banks comes out on page 25 of the report, and this inter alia shows how from 2016 to 2017 lendings to construction and real estate activities (13.2 to 13.3 per cent), and the wholesale and retail trading sectors (8.5 to 8.1 per cent) remained more or less consistent, but then the banks lent much more of their (their customers’) monies to the households and mortgages sector (from 45.9 per cent in 2016 to 48.3 per cent). Would one contradict the assertion that the citizenry of this country is moving ever more rapidly and deeper into personal indebtedness?

The annual contribution to growth in customers’ deposits with the core domestic banks over this period is on a very steadily falling rate, after the high reached in 2014

On the other hand, on this front the aggregated ratios for NPLs (jargon for people borrowing but then not honouring their repayment commitments), as illustrated by chart 2.8, show a very encouraging picture over the whole span from 2014 to 2017. NPLs have fallen over this span in all component sectors, viz resident non-financial companies, resident consumer credit and other lending firms, resident mortgages, non-resident lendings, and of course the total thereof.  It is not incorrect to hold that with more people employed, and more people earning higher incomes, then honouring one’s financial commitments to institutional lenders is that tad little easier.

The old joke about how simple banking really is (they take your money at one per cent and then lend it at eight per cent) would, to the casual, non-professional, reader of a report such as this, simply push to just looking at details regarding lending activities, and then those concerning how fast (or otherwise) the banks are in the raising of depositors’ funds for, in fact, such lending (plus investing) activity.

Chart 2.12 suggests a worrying trend line over the period 2013 to 2017. The annual contribution to growth in customers’ deposits with the core domestic banks over this period is on a very steadily falling rate, after the high reached in 2014. Resident customers’ deposits, and non-resident customers’ deposits (these indeed having gone into negative growth over 2016 and 2017), seen and analysed in the percentage terms that this chart presents – rather than the mere annual trumpeting of millions at AGM’s or in individual bank’s annual reports – these should always be considered in such important trend patterns. 

So, contrasting with the report’s text regarding customer deposits generally, a simple deduction here could well be that both Maltese and foreigners used to keep their funds in our banks, well these seem to be saving less, especially where it comes to longer-term deposits. For future economic planning this is important (il risparmio è alla base di ogni piano, the former Italian president Giuseppe Saragat used to tell us banking students way back in Rome) and one may well need to consider what can be done in this direction.

It will admittedly be difficult to attract more savings domestically when most households are incurring more debt, and rewarding interest rates are simply ridiculous. But some thinking can always be given to attracting foreigners, rather than simple FDI (sendings into Maltese property) that do little other than making Malta ever uglier a place to live in.

Brief newspaper coverage of an important document such as this can never give due justice to the many other elements covered in it. It opens with a general coverage of what are the types of macro-prudential risks and the local policy response to them specifically in the context of a thriving Maltese economy. The bulk of the report is then concerned with developments in the banking sector to some of which reference is made above.

Few people in Malta are aware of the stress tests that all financial institutions in Malta are subjected to by both the Central Bank and, in some cases, even by the ECB. There is extensive coverage of these tests, and, even at the risk of their attracting some derogatory comment from some customers or sections of the media, it is good to see that the sector has come out very well over the last series of tests.

There is an extensive eight-page treatment of stress tests in the Malta financial sector in this report.

The last part of this report is about the other two main sectors of our national financial industry, insurance companies and investment funds companies. There are 63 insurance and reinsurance companies, and 44 systemically relevant sub-funds operating in Malta, and competition in these parts of the financial market is possibly even stronger than in the banking sector. Both are doing well, both are very well regulated, and both – unlike banking – have thankfully not been in the public or the media’s eye at all over recent years.

Indeed these are sectors which, even as Brexit looms ever closer, could (or should?) be the target for attracting to the island more foreign operators.

John Consiglio lectures in the Department of Banking & Finance at the University of Malta.

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